February 5, 2012 4:51 pm
Operators braced for India licence fallout
By James Crabtree in Mumbai
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The court ruling has been described as ‘a Richter 10 quake for the sector’
The day after India’s supreme court dramatically cancelled 122 mobile licences Vodafone took out a series of provocative front page newspaper adverts, with the strapline “everybody’s welcome to the network you can depend on”.
The message was clear: while many of their smaller, unluckier competitors are being forced to rethink their future in India’s fast-growing but ferociously competitive telecoms market, Vodafone see a chance to win market share as part of a long-anticipated consolidation.
Last week’s unexpected ruling – described by one senior telecoms executive as “a Richter 10 quake for the sector” – is now finally set to transform a market in which 15 players have piled on customers but failed to make much in the way of returns.
The court set a timetable of just four months before the licences will be revoked, and gave the Telecom Regulatory Authority of India only two months to propose a new auction method – a tight timetable given India’s notoriously slothful regulatory processes
The good news is that domestic customers are unlikely to be much affected. The vast majority of those affected are on pay-as-you-go contracts, while number portability rules make it relatively easy to switch companies.
But coming only two weeks after investors welcomed a separate supreme court ruling, backing Vodafone in a multibillion-dollar tax dispute, the latest decision again seems to confirm India’s reputation as a nation where capricious and unpredictable regulation can all too easily ensnare foreign companies.
The three most affected – Norway’s Telenor, Russia’s Sistema, and Etisalat of the United Arab Emirates – feel aggrieved. All three won their second generation (2G) licences according the rules set by India’s government, only to see the telecoms minister end up in jail on charges of handing them out at well below market value.
Telenor in particular faces a tricky decision, having invested more than $2bn in India through a joint venture with a real estate company. Unlike most of the other 10 companies affected, their business also has a sizeable and rising market share, with 36m customers.
The company says it will fight the ruling, although its legal options are limited. More worrying is the cost it may now have to pay to stay in the world’s second largest mobile market by number of subscribers.
A note following the verdict from Espirito Santo, an investment bank, suggested Telenor’s licences could be worth as much as $6bn, given statements from Indian authorities valuing the mis-sold 2G spectrum at around $39bn.
Nick Paulson Ellis, the bank’s chief executive in Mumbai, said: “Telenor’s shareholders would not be prepared to support management paying anything close to that figure to remain in India.”
As the losers weigh their options, the larger and luckier players are staying quiet; both Vodafone and Bharti Airtel, who were also unaffected by the ruling, refused to comment. But analysts think both will bid for further licences if the rules allow it – so long as they can also pick up scarce and badly needed mobile spectrum.
Before this can happen, however, India’s regulators must design new rules for handing these out and in turn cope with the potential reaction from the various aggrieved businesses.
“This decision will ultimately lead to a shake-up in the licences and spectrum in the market, and therefore consolidation” says Tom Levine, head of telecoms at Allen & Overy. “But if the regulator designs an auction that holds the current operators to ransom, they may sue to stop it, delaying the process well beyond four months.”
Meanwhile other wild cards are possible, not least potential interest by new Indian entrants, most intriguingly from billionaire Mukesh Ambani’s Relianceempire. India’s richest man re-entered the telecoms sector in 2010 by buying a licence for 4G wireless data services, igniting speculation that he would ultimately seek a regular mobile licence too.
“Mukesh Ambani has the muscle, he has the ambition and he probably has the staying power to live with a few years of weak returns.” says Anand Shanbhag, head of research at Avendus Securities, a Mumbai-based investment bank. “This is an opportunity for him, and it would be hard to imagine Reliance not bidding aggressively.”
Whether or not Mr Ambani enters, those that do survive the coming shake-out can look forward to a more consolidated and profitable era. But the likes of Telenor will have to fight hard to make it through at all.
February 6, 2012 5:12 pm
Indian telecoms: tough call for investors
Should they stay or should they go? Investors in India’s mobile telecoms sector are facing a regulatory backlash. The latest blow came last week when the supreme court ordered that 122 second-generation telecoms licences awarded in 2008 should be revoked. That has shifted the ground under telecoms operators, thrown spending plans into doubt, and sent a damaging signal that India’s foreign investment climate is desperately in need of improvement.
The immediate result is that telecoms operators are taking a big hit on the bottom line. Norway’s Telenor, which holds two-thirds of Indian operator Uninor, has primed shareholders for a Nkr4.2bn writedown against the value of its Indian licences following the court ruling. The move is likely to push the company near to a fourth-quarter loss. Idea, the largest domestic operator caught up in the scandal, will have to rebid for licences or lose customers in nine regions.
India now faces the threat that its telecoms market could be halted in mid-development. Subscriber additions grew by a fifth last year to 890m, but with about two-thirds of this group regarded as active users, and a sixth of them with multiple Sim cards, more than half of India’s 1.2bn population have yet to hook up to a mobile phone. Investment is required to expand networks beyond more saturated urban regions and support third generation services.
Intense competition has weakened many operators’ financial clout. Bharti Airtel, the market leader, saw net margins halve in its fiscal 2011 from a year earlier as tariffs went into free fall. Capital expenditure among the top three domestic operators fell by a quarter that same year, notes PwC. The supreme court is making an important point about corruption. But ongoing regulatory and legal uncertainties will do little to win over those with capital to invest.
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